Pseudomonas exotoxin (PE) is cleaved by cells to produce fragments of 28 kD, from the N-terminus, and 37 kD, from the C-terminus. This step is necessary to generate the C-terminal fragment which contains ADP-ribosylating activity and is translocated to the cytosol. Mutant forms of PE that cannot be cleaved, are not translocated to the cytosol and are not toxic. The protease responsible for cleavage is a membrane-associated enzyme and its activity can be detected in crude membranes from L929 cells. The pH optimum for cleavage is 5.5. Cells were fractionated on Percoll gradients and the proteolytic activity was found in fractions corresponding to endosomes but not in those containing lysosomes. The cleavage of PE by membranes is stimulated by divalent cations. The addition of EDTA completely inhibits the generation of the fragments. However, inhibitors of serine proteases and other inhibitors of metalloproteases do not. Membrane preparations cannot cleave PE276G, a mutant form of PE previously shown to be nontoxic because cells failed to generate a 37 kD fragment. Protease activity can be solubilized using non-ionic detergents (NP-40, Octyl-glucoside). Fractions with proteolytic activity have been recovered after ion exchange and gel filtration chromatography. The site of cleavage within the PE molecule is an arginine-rich loop, close to arginine 279. Mutagenesis of the PE gene close to arginine 279 has located residues that are needed for proteolysis and toxicity. Mutagenesis at the C-terminus of domain II has located residues important for translocation. A PE-binding protein, thought to be the PE-receptor, has been identified. While the receptor is known to be present in crude membranes and detergent extracts, its role in the proteolysis step is currently not understood. To understand further the biologic effect of the arginine to glycine mutation at position 276, TGFalpha-PE40276G was produced and tested for cytotoxic activity.